Fastow says Skilling blessed Enron deals

March 08, 2006|By Leon Lazaroff, Tribune national correspondent.

HOUSTON — In emotional and exhaustive testimony, Andrew Fastow, Enron Corp.'s former finance chief, told a spellbound courtroom Tuesday that Jeffrey Skilling, the energy company's onetime chief executive, was well aware Fastow was hiding hundreds of millions of dollars in debts while inflating the value of various company businesses.

Fastow said he executed the transactions because he saw it as a chance to help the company meet Wall Street expectations and, additionally, to make millions of dollars apart from his salary as chief financial officer. As a large Enron shareholder, Fastow acknowledged he stood to gain considerably if positive financial news raised the company's stock price.

"I thought I was being a hero for Enron," he told the jury. "What was good for them would be good for me. I would step in to rescue Enron and bail them out."

Skilling and his co-defendant, Kenneth Lay, Enron's former chairman, are on trial for lying about the company's financial health, charged with pumping up the company's stock price in order to profit through the sale of company shares.

Though Fastow did not directly claim that Lay ordered him to manage the partnerships, he said that as chairman of the board, Lay approved the partnerships, was aware of their purpose and knew that he and his staff would make money from operating them. Lay's role in the company is expected to be at the center of Wednesday's testimony as Assistant U.S. Atty. John Hueston continues to question Fastow.

More than any other corporate scandal of recent years, Enron stands out, in part because the glowing, even gloating pronouncements of its executives in the late 1990s turned out to be in such stark contrast to the ethics of its business dealings, and ultimately, its financial health. Enron, once the country's seventh-largest company, declared bankruptcy in December 2001.

Appearing in court for the first time since pleading guilty in January 2004, Fastow, 44, used his court appearance to explain his role in the scandal.

Equally, Fastow, looking thinner than he has in the past, appeared to see a chance to publicly apologize to his wife and two sons, who live in Houston. In testimony that began early in the morning and lasted through the day, Fastow repeatedly broke down when talking about his wife, Lea, who pleaded guilty to a misdemeanor tax-evasion charge related to his fraudulent dealings and served a year in prison and a halfway house. She was released in July.

"In short, I misled my wife," he said, struggling to speak as his fought back tears. "I convinced her that these checks we received were gifts even though I knew that was not true." Fastow pleaded guilty in 2004 to two charges involving securities fraud and conspiracy to commit wire fraud and agreed to serve a 10-year prison sentence.

In the most graphic description so far in a trial entering its sixth week, Fastow told of creating numerous complex "off-balance-sheet" partnerships in which he did not disclose that he managed the partnerships and gained financially from doing so. Fastow also testified that he hid information, with Skilling's support, that the partnerships did not include at least a 3 percent ownership from outside investors as required by law.

At its heart, Fastow said, the partnerships were a place to hide bad debts and if necessary to overvalue assets to meet Wall Street earnings projections.

When funding for a partnership ran dry, Fastow testified how Skilling told him at least twice to "get me as much of that juice as you can." Fastow said he took those comments to mean he should create another similarly structured off-balance-sheet partnership.

Fastow took a lead role in structuring the partnerships after he was promoted to finance chief in 1998. A short time later, he set up a partnership called LJM, using the initials of his wife and children.

LJM eventually gave birth to LJM2, and a flurry of partnerships used to mask losses in such deals as a failing Brazilian power plant and a fleet of Nigerian barges carrying electrical power plants parked off the African country. Both deals were executed in late 1999, part of a rush by Enron to make sure its various business units met Wall Street's earnings forecasts.

In a late-1999 conversation with Skilling about the Nigerian barges, Fastow recounted that he initially opposed having LJM buy the barges. "I told him it was a piece of [garbage] and no one would buy it," he said.

But Fastow said Skilling assured him that although LJM, with the help of Merrill Lynch & Co., would buy the barges, Enron would eventually buy them back.

"The culture of Enron, the way business was practiced, was to maximize the transaction to report earnings rather than to maximize the actual transaction of the business," he said.